Christmas present for consumers or headache for retailers?

November 28, 2008

If you run a VAT-registered business, just be grateful you’re not Asda right now. It estimates that it will take 100 man-years worth of employee time and cost £10m to implement the temporary VAT reduction from 17.5% to 15%!

Although e-commerce businesses are fortunate not to need to change physical price-tags in hundreds of shops, the exercise will still be a headache. As a helping hand, we’ve summarised the relevant rules and offer a few practical tips below:

What’s this about a VAT reduction? (I’ve been in a cave for a week!)

• On 24 November 2008, the Chancellor announced a temporary decrease on the standard rate VAT to 15%. Any sales of standard-rated goods or services that take place on or after 1 December 2008 should have VAT charged at the new rate.

• Standard rate VAT is due to revert back to 17.5% on 1 January 2010. But many commentators speculate that the Government might take that as an opportunity to raise rates, in order to recoup its losses.

What do I need to do? How will this affect me?

• You will obviously need to adjust your accounting system and should visit the manufacturer’s website in order to determine the best way of doing this.

• It has been speculated that some retailers will not pass on the full extent of the savings. But in the last few days, there has been something of a price war between major retailers eager to be first to pass on the cuts. Between recouping your costs and the risk of adverse publicity that you are profiting from the rate cut, you will need to decide how much to pass along and how to present it.

• Assuming you pass on the full extent of the savings to your customers, the change will be revenue-neutral for most businesses. But don’t forget to factor in your costs of effecting accounting and pricing changes… and the additional costs to be incurred in 2010 when the rate goes up again.

• This is likely to be good news for businesses providing financial services which will see a reduction in the amount of irrecoverable VAT. Yet another banking bailout?

But in my business… - FAQs

• The most complicated scenario will be for businesses which take part payment (e.g. deposits) before the rate change or provide services over a period of time with intermittent billing.

• When is the “tax point”? The VAT rate you must charge depends on whether or not the tax point falls before 1 December. The tax point is broadly the earlier of when a VAT invoice is issued, when goods are delivered or services completed or when you are paid, subject to detailed rules which may apply to your type of business. Tax point obviously takes on increased significance by virtue of the change in rules. For instance, a VAT invoice may have been issued for goods or services to be provided after 1 December.

• Can I invoice at the new rate for goods/services provided earlier? If you are required to issue VAT invoices you must use the new rate for all VAT invoices on or after 1 December 2008 except for where you provided goods or services more than 14 days beforehand or you were paid before 1 December or you are providing a continuous supply of goods or services.

• What if the goods or services will not be provided until later? Certain special rules govern supplies of goods and services that span the rate change, which broadly enable you to correct the tax point to the later date on which goods or services were actually supplied. HM Revenue and Customs stress that it is not obligatory to apply these rules. But where your customers are not VAT registered, they are unlikely to thank you for not passing on the savings. To correct previously issued invoices, you will need to supply a credit note to customers before 15 January 2009.

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